Nic Lenoir On Visualizing The Gobal Ponzi Scheme: How Does It End?

Tyler Durden's picture

From Nic Lenoir of ICAP

It is not a new theme: asset prices are a function of liquidity expressed in USD. This is the direct result of inflation in USD denominated products having become a pure function of credit creation in our post-2000 world economy where the US has a low enough capacity utilization that wage inflation no longer exists, all commodity prices are expressed in USD, most products are traded in USD, and emerging markets are driven by credit-generated Western demand given the mercantilist nature of their economies. We have spoken on this at length in the past showing the effect on asset prices of the printing press, and conversely the dangers of a strong USD when 2/3 of global liquidity is actually not denominated in USD (this figure is slightly misleading given the fact there are other currencies indexed on the USD but certainly it is close enough to give an order of magnitude). If there are still any doubters just look at the weekly Gold chart since 2001, and then compare it to global aggregated liquidity expressed in USD for the same period. Both charts are using a log scale... enough said.

My entire focus right now is on the commodity complex. The reason why is simply because I believe the post-dotcom economy is completely unsustainable, and this is not only starting to be very much apparent to the general public but also fiscally very expensive to maintain. However, governments are inventing all sorts of accounting trickery, legal vehicles, and running the printing presses overtime in order to preserve the status quo. Maintaining this situation, which is quite the opposite of an equilibrium (consumers don't produce, structural deficits, unfunded liabilities, pegged currencies preventing the markets to rebalance trade etc...), will lead to bubbles and complete mispricing of financial assets. Only when financial markets are taken to extremes that provoke public anger turning into violence will politicians be forced to actually think of the structural issues without having the luxury of hoping that the next one in the seat will be the one facing the task. If bonds sell-off riskier assets will be repriced lowed to reflect higher rates in turn provoking greater demand for bonds. So the most likely culprit for the end game will be commodity prices since nobody will ever complain if stocks rise 400% (a 10% drop is a national emergency). Only when commodity prices are high enough that they put the entire system at risk will we be forced to let nature take its course, companies and governments default, and experience the deflationary shock that we cannot ultimately avoid. This reflection became much more concrete than theoretical when I watched on the news cops dressed as civilians being lynched by the Tunisian mob over the weekend.

This led me to look closer to commodity markets and assess where we stand. First it seems clear to me that Gold is not really the relevant commodity to follow because it is an investment and does not hurt the consumer. Instead I feel the Rogers Commodity Index is a better proxy as it encompasses the broader commodity complex as an asset class. In terms of Elliott Wave consideration we have pretty much a classic 5-leg impulse since last July which means a correction is quite imminent. This by the way is pretty much in line with observations made yesterday that VIX is at levels where risk usually is repriced. I was in favor or reloading DXY longs at 78.80 yesterday. As long as the 61.8% retracement at 77.85 is not bypassed I would stick with the trade, especially given the fact we made money during the last rally in early January given us staying power in the trade. Another way to express this trade would be to sell AUDCAD here as we retested the 50-dma, observing a stop if we bypass 1.0030.

Concurrently this made me rethink my outlook on Fixed Income for the very near term. While I have been an advocate of Bund underperformance, the market seems to be struggling to move lower here. I would close out shorts and even consider a tactical long to play a pull back towards 125.50 before we sell off toward our medium term 121.45 target. I think 10Y US Treasury futures have overall not really traded like they made lows yet since mid-December but I see resistance around 121-25 so I would be rather neutral here after yesterday's sell off as we are in the middle of the range here.

Last but not least even though it is not related, I would also recommend closing the EURCHF / European equities trade we recommended in late December. I added the chart showing the spread between the 1M change in EURCHF and Eurostoxx, both adjusted for their implied volatility. As we can see the gap in the risk aversion shown by the EURCHF pair and the the risk appetite shown by European equities has been filled.

Good luck trading,


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Turd Ferguson's picture

I Love Nic but you absolutely MUST watch the USDX VERY CLOSELY over the next few hours:

SilverRhino's picture

Ok, I'll ask ... why???  Are we talking meltdown, meltup, default, etc?

French Frog's picture

Put a 60 SMA on a Daily $ Index chart with End Of Day (EOD) data and trade in the direction of the close (ie if $ Index closes above the 60 SMA, go long $ and short if it closes below); this has not failed once since May 09;

2 days ago, the $ Index closed below the 60 SMA and yesterday it failed to regain it; today the 60SMA is at 79.31: stay short $ unless we get a Daily close above that number today.

Turd Ferguson's picture

Very good point, Frenchy.

Btw, with O'Bottom and Long Duk Dong starting their joint presser, it might be wise to watch the video of their last joint appearance:

French Frog's picture

Thanks TF, but due to copyright, the video can only be viewed in the US, so us europeans can't see it

Pladizow's picture

Is your avatar meant to make homosexuals dizzy?

jdrose1985's picture

Why the sense of urgency?

The dollar bears have been living on the edge of their seats for years now.

Turd Ferguson's picture

Look at the chart on the post and you'll see why.

I'd simply post it here but I'm not allowed...which is why I started my blog in the first place.

thetruth's picture

Turd, my workplace has suddenly blocked your website for the first time today.  Would you mind pasting the textual portion of your post for people right here on ZH?



Turd Ferguson's picture

Do you work at JPM or an affiliate???

Here you go:

"At 78.44 on 11/21/10, suddenly the dreaded PIIG story re-emerged to give the USDX some strength. At the same level today, don't be surprised if Long Duk Dong and O'Bottom issue some type of "joint statement" that gives the buck a boost. If they don't, and 78.44 fails, look out below! We'll see 150 basis points come out real fast and a move to 77 will certainly provide the inspiration for solid bids in the PMs, all the way back up over 1400 and 30.

thetruth's picture

Thanks, Turd.


And no I don't, but thanks for the insult!  Hahaha


Would like to buy back in on gold and silver soon

thetruth's picture

looks promising.  maybe will pull the trigger if still holding up in off hours

NOTW777's picture

support @ 79 is gone unless some invisible hand saves it;

they are holding PMs under water like a beach ball as the dollar dives

erik's picture

Interestingly, the stock market is not getting a bid even though the USD is weak, and perhaps more importantly neither is copper.

HarryWanger's picture

It's catching a bid now. SPX will close -2 to flat. You should know the game by now. Run it down and buy the dip. Hasn't changed in weeks.

erik's picture

I don't recall saying that dip buyers wouldn't show up.

SPY touched its 10 day moving average and found a bid so far.  I expect much more out of the dip buyers though.  They seem to be slow on the uptake today.  I doubt they will buy it back to even today, but they should have it back to even by tomorrow given recent track record.  Copper isn't interested though so far.

mule65's picture

Not so much SPX and Nasdaq.  Pain at the pump is back.

LooseLee's picture

Sorry USSA Minister of Propaganda. Didn't quite work out that way. Looks like a correction is imminent. Just when you buy into the bullshit it turns on you. Buying the dip on equities based on consumption in the USA may proved to be this decade's worst trade! Profligate consumerism (the USA) will be the death of our economy. Those who propagate the deception and outright lies of the MM and 'official' mouthpieces will be those with a bullseye on their forehead when boobusamericanus finally wakes up. Harry, have you looked in the mirror lately?

SheepDog-One's picture

Thanks Turd. Its a shame Robo has chart posting privileges here and you dont!

Tense INDIAN's picture

i so dearly want the dollar to come down

Orly's picture

Sell EURCHF to 1.22.

AccreditedEYE's picture

Hey Orly, sorry for the OT, but are you still holding/buying UNG? What do you make of its inverse correlation to equities? 

Oh regional Indian's picture

Spot on nic. hard commodities, soft commodities, edible commodities, that is the complex complex to watch. Oh, and flamable commodities too, maybe especially today.

Oil is the biggest lever and completely controlled, Opec, Shmopec.

Any ideas for what will happen when Oil goes back to 140 in short order (Hormuz, Bab al Arab incident waiting to happen).

On oil this grew and on oil it will die. And good riddance. The industrial economy that is.


Cdad's picture

All but one of the signals [L. Blankfein Wildest Dreams Park] is suggesting the USD Stud man is about to have his way with everything alive. 

I hope it is the case because that would end the DUMBEST EQUITY RALLY IN THE HISTORY OF THE WORLD!  Although we are just sitting here after our morning sell off...the sell programs on underlying issues are continuing to surge through the equity market, again and again...selling without moving things through the miracle of HFT.  So the equity market is confirming its fear that the morally depraved USD stud man just might show up all ready to make adult movies.

The Euro will also TELL the move of late there is so laughable that I sometimes have a hard time typing...especially when I hear that Goldman is upgrading that currency.

Throw on top of the entire burning heap of rubbish...the action on the shares of the world's largest zombie maker...which you would think would be heading for the criminal syndicate Wall Street bankers try to change the narrative that S. Jobs is not really all that most folk are guessing now that he will not be returning to that company....ummmm...ever.

JW n FL's picture

Dearest Tonto,


Why do you think that minus the polite people who are printing into infinitim... that your personal quality of life will be the better for?

please explain minus all the sheepeople purchasing cheaply made goods from across the indian ocean, why that will be good for the 3rd world / brics...

please explain what you view your quality of life as minus all these polite liars trying to help you...

please explain if you have any concern for regional rulers breaking out minus some type of real / fake sense of law binding the sheepeople together? maybe you have never been close enough to a war lord to comprehend that question?

if you resort to personal attacks and skip the questions, I will of course understand.

Oh regional Indian's picture

Your words: Dearest Tonto


if you resort to personal attacks and skip the questions, I will of course understand

Good to see you have a sense of humor.

Enough said.


JW n FL's picture

weakling, you cant handle a chat room... but you want the lights to go out... point taken.

topcallingtroll's picture

I know how it ends. St vincent.mccrudden vanquishes the evil midget demon GG .and his 46 princes of darkness. Have faith people. This is all part of His plan. In a thousand years his martyrdom will.have changed the world and children will sing songs to him in again....maybe not.

alter ego's picture

No to be religious or out of the subject, but as an illustration for the people that believe that the market Bears are like the boy who cried wolf.

Here is some wisdom:

“For as in the days before the flood, they were eating and drinking, marrying and giving in marriage, until the day that Noah entered the ark,” (Gen.6-7).

We all know what happened after Noah entered the Ark.

sockcutter motorforker's picture

might as well be when you have 2 to choose from

sockcutter motorforker's picture

i mean you can only choose one. hard choice now, isnt it?

Watauga's picture

I don't understand this comment on any level.

MachoMan's picture

noah had an erection and pulled aside his robe and inserted his erection into a pig's bottom... I presume english is your first language?

PS, he also had a helper monkey that tagged the pigs that did not kick.

LooseLee's picture

Sounds like something wanker and robo would do..

Cash_is_Trash's picture

Man the Epsons, HPs, Xerox's, Lexmarks and Kyoceras!

It's gonna be a print to the finish!

Quinvarius's picture

The Fed and the bankers act only in their own interests.  They feel what is best for them is also best for the country in the long run.  They will pound the stock market into the dust if they think the dollar is going to far down.  They actualy believe the dollar is a safe haven and people will flock to it if the markets go bad.

gwar5's picture

As long as the West is as broke as it is, nothing has changed, Ponzi in effect.

US is worse off because we are pussies and used to the reserve currency status.

PM's for the long haul and store of value. Buy the F'ing dips.

Economic emergencies: nationalizations of miners possible

max2205's picture

Buy the dipper's are wondering if this is the dip to buy. Lol

HarryWanger's picture

1282 seems to be the SPX trigger for the dip buyers. Bounced quickly off that level.

SheepDog-One's picture

Oh, thats where the dip buyer Bernanke bought? You fuktard.